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Este informe no está disponible en español. CARIBBEAN BUSINESS I Promise... One of these two men will become governor of Puerto Rico next January. Here’s what each intends to do if he gets to La Fortaleza. By CB STAFF July 22, 2004 Editor's Note: This is the second installment in the CARIBBEAN BUSINESS series on the proposals of the two major candidates for governor—in their own words. Pedro Rossello of the New Progressive Party and Anibal Acevedo Vila of the Popular Democratic Party discuss their proposals for tax reform, manufacturing, retail, and health. Don’t miss their views on tourism, the environment, ports, corruption, and status next week. We tried by all means possible to present the programs of all three candidates. For weeks, we attempted to interview Puerto Rican Independence Party President Ruben Berrios Martinez, to no avail. He simply didn’t make himself available to CARIBBEAN BUSINESS. Acevedo Vila preaches a revolution to solve generations-old problems CB: What new local tax incentives would you support to promote Puerto Rico’s sustained economic growth? What other measures would you implement to alleviate the burden on local taxpayers? AAV: This is a different government program from what the political parties, including mine, have been doing in Puerto Rico because it emphasizes the vision of the future. Obviously, there are promises, but what I want is for the people to tell me if they agree or don’t with my vision of where Puerto Rico should be heading. The fill-in-the-blanks part will be done once we are in power. If we are going to lower the tax rate to 4%, 5%, 10%, or 20%, that is just the detail. Here [in the PDP’s government program] we don’t have una quincalla (a general store). This is a government program in which I presented my vision of where I want to take Puerto Rico; according to that vision, a series of public policies were developed. In the traditional way government programs are made, a candidate names a group of experts on different topics who meet with different groups. A wish list is made and is later included in the government program. But when you try to implement it, you realize you can’t. You won’t see that happening here. In the area of tax reform, there are two parameters. First, that there be true tax justice for middle-class workers, the so-called ham in the sandwich. More than 80% of the government’s tax revenue comes from the middle class. Second, that it be a tax reform that gets the money rolling in this economy and doesn’t penalize success. From that perspective, you’ll see a commitment to substantially reduce tax rates, but aimed specifically at the middle class. We will propose to increase the minimum salary required to file an income tax return from the current $10,000 level. With those elements as my guide, I’ll do all the restructuring that needs to be done on things such as a sales tax. But I am not going to put the cart before the horse. The objective has to be a tax reform that does true justice to middle-class workers and stimulates economic activity without penalizing it. CB: Will you replace the excise tax (arbitrios) system with some sort of sales tax? AAV: Right now, the Treasury Department (Hacienda) is doing a study to which I’m going to give serious consideration. The replacement of the excise tax with a sales tax or a value-added tax has to be considered in light of the two parameters for tax reform I mentioned before. It is important that if during the process we aren’t convinced the excise tax meets its purpose, it is modified or eliminated, or we have to bring in a different consumer tax. The objective can’t be to implement a sales tax but to lessen the tax burden on the middle class. I’m going to create a tax system that fosters economic development, not impedes it. CB: Puerto Rico’s manufacturing industry is concerned about issues that hinder its competitiveness in a global economy such as high electricity costs, spiraling labor costs from increasing fringe benefits to employees, and the loss of federal tax incentives. What will your administration propose to lower electricity costs? AAV: Our plan covers a number of measures to diversify our fuel sources. There is a commitment to build a natural gas plant in the west and to repower San Juan’s Units 5 and 6, which will increase power generation capacity by 1,000 megawatts. A gas pipeline will also be built to connect the natural gas plant in the west with EcoElectrica in Guayanilla. As infrastructure improvements are made to the island’s southwestern highways, the pipeline will be extended to San Juan. We will encourage the development of alternative energy sources such as solar and wind energy and programs to convert solid waste to energy. A pilot project in the municipality of Caguas will involve fuel cells that generate energy from the reformation of natural gas to hydrogen. CB: What is your opinion on increasing employee fringe benefits and how they add to the costs of doing business in Puerto Rico? AAV: That goes to the heart of our <I>Apoyo al de Aqui</I> initiative [Support to Our Local Entrepreneurs]. Our program, A Key to your Business, will provide young businesspeople with access to a high-risk capital fund to develop small businesses. We will create Tax Free Zones in urban areas to help residents and businesses: Families earning less than $90,000 and individuals earning less than $45,000 a year will be tax exempt for a set period of time. We will ensure that 15% of all government purchases and contracts go to local small and medium-sized businesses. We will also enact prompt-payment legislation [to force government to pay its suppliers and contractors in a timely fashion]. We will incentivize the creation of childcare centers in the private sector so mothers can leave their children in a safe environment. CB: What initiatives are you proposing to attract more R&D to the island? AAV: Manufacturing basically has three stages: research & development (R&D), product manufacturing, and marketing & distribution. For the past 30 years in Puerto Rico, we have been the champs in [manufacturing]. At one time, we made inroads in marketing and distribution from the island for some companies that used Puerto Rico as their base, but unfortunately, in the past 15 years, we have started losing that business sector or have lost it completely as many businesses have transferred to Florida. If we want to maintain a competitive edge and expand our possibilities of strengthening the manufacturing industry, we have to move into R&D. There are billions of dollars waiting to be invested in this stage. This is where we implement R2D2, a joint effort in which academia and government join hands in research, and the government and private sector work on development. We have the numbers to show for it. We have a college of medical sciences that is among the best in the world; its graduates are doing R&D in other parts of the world. We have the University of Puerto Rico-Mayaguez and an excellent private engineering university [Polytechnic University] in San Juan. Mayaguez’s engineers are recruited by the National Aeronautics & Space Administration. Then you have the entire pharmaceutical and biotechnology sectors. The first sector is stable and the second is starting to grow. What there hasn’t been is a government public policy linking the needs of these two areas with the ample resources available from the federal government. We are contemplating creating a Puerto Rican Science & Technology Development Institute to do just this. We will also establish five world-class research laboratory centers in public and private universities, starting with nanotechnology [in Mayaguez] and biotechnology, biomolecular sciences, and food technology centers. I have begun discussions with plant managers in Puerto Rico’s pharmaceutical and biotechnology sectors and my goal for the next four years is to invest $1 billion in R&D from a combination of federal government, central government, and private sector funds and generate $3 billion for further economic development. CB: What kinds of tax incentives will your administration support? AAV: I will fight for new federal incentives but my economic development proposal doesn’t depend on them and to me that distinguishes me from others. I will also fight for federal incentives without dragging in any kind of philosophical problem related to status. [The possibility of achieving in Congress the proposed amendments to] Section 956 has been looking brighter and perhaps [I will fight for] that one or some other. I am not bound by ideology. This isn’t an ideological matter; it’s a matter of jobs and more competitiveness for Puerto Rico. We are waiting to see the U.S. General Accounting Office’s study [on the cost of Section 956] for the U.S. Senate’s Finance Committee, but by all accounts, it doesn’t seem as if it will be ready until the end of this year. But this will give us a platform so we can return in January and keep looking for incentives. A number of local tax incentives appear throughout my political platform for such areas as increasing exports and turning Puerto Rico into an export center. We are using the Commonwealth’s fiscal autonomy to target different areas that we want to incentivize. Our platform contemplates tax incentives for high-technology programs in their development and commercialization stages. We will create incentives for local businesses to acquire companies leaving the island so locals will continue operating the facilities. We will also incentivize the creation of local businesses that provide subcontracting for large foreign companies. CB: How will you strike a balance between the market’s demand for larger and cheaper retail offerings and the needs of small retailers, particularly in small towns? AAV: One of the great myths we hear in Puerto Rico is that our economic salvation will come from outside. For more than 100 years, we have been saying huge investments from outside will create the jobs we need. Outside investments have come; but it is evident that in a highly competitive global economy, they won’t generate the number of jobs we need. Foreign investment can’t be the pillar of our economy. Our salvation is in our hands. That is precisely why the essence of my economic proposal is called Apoyo al de aqui [Support to Our Local Entrepreneurs]. In 2004, our economy isn’t the same as it was in the 1940s. Our entrepreneurs are highly qualified and in terms of academic preparation, we are intellectually and professionally capable. We have sufficient capital and when we don’t, we can assume risk and borrow. Therefore, we recognize that now we have the opportunity to develop our economy and break the 10% unemployment-rate barrier. Truth is, for the past 30 years, no one has been able to consistently lower the unemployment rate below 10%. We need to create an economy that is competent in multiple areas and we need to support our own. "Support to our local entrepreneurs" means recognizing that our small, medium, and large businesspeople must take chief responsibility for creating the jobs our economy needs. Meanwhile, the government must evolve so its public policies support the local business sector. In the [mainland] U.S. 75% of all jobs aren’t created by multinational companies. They are generated by small and medium-sized businesses. We must adopt this model. I see government as businesses’ ally. It must defend citizens’ well-being, which it does in part by creating jobs. There has to be an understanding that if we stand in the way of the success of local businesses, we can’t help generate jobs. We have designed a plan called "Operation Success," which we will use to identify 1,000 local businesspeople to give them access to a risk capital fund dubbed "The key to your business." This plan will equip them to create at least 10 jobs each in four years. CB: How do you plan to control increases in the government’s health plan, know as the Health Reform? Will you consider altering the range of benefits it offers beneficiaries? AAV: Cost increases are part and parcel of every health-insurance plan. Puerto Rico faces three problems involving public health. The first is access to healthcare services. Before the Health Reform was implemented, access to healthcare wasn’t a problem because we had Diagnostic & Treatment Centers (CDTs) and plenty of public hospitals. That is no longer the case. There are 200,000 to 300,000 residents without access to healthcare because they aren’t poor enough to be considered medically indigent, but don’t make enough money to afford plans or don’t have employers who offer them. The second problem involves the quality of service. Before the reform, quality varied. In some areas, it was poor, in some it was acceptable, and it was excellent in others. No one could beat Puerto Rico in tertiary and supratertiary [e.g. heart transplants] services, for example. Even those services are getting mixed results now. Some people attribute this to capitation and transferring risk to insurance providers, while others blame the reduction in number and quality of supratertiary services on privatization. Centro Medico is overcrowded because when cases are too complicated, private health plans just dump them on Centro Medico. Cost increases are the third problem. The problem was there before the Reform...the Health Department was broke and spiraling costs kept increasing its deficit. The problem hasn’t disappeared, but the island was promised the Reform would stop costs from rising. It didn’t work. To make healthcare access more widespread, the government could allow ineligible residents to sign on to the government’s health plan for an affordable price. Second, we can create a discount card similar to what Medicare offers. Although the cards aren’t health plans, we can negotiate rates with providers so beneficiaries pay lower rates per visit. The advantage for providers is that they will attract clients. Plus, we could ask employers to contribute to employees’ health benefits to help the 200,000 or 300,000 who don’t have medical plans. We plan to evaluate Guayama’s direct contracting pilot project, which is being extended to other municipalities. The plan turns insurers into administrators, the physician-patient relationship is improved, and the government takes on part of the risks so the quality of healthcare isn’t affected. Another plan that reduces costs while improving service is what’s called Medicare Platinum. In Puerto Rico, some people have Medicare alone or Medicare and the Health Reform. Those who have both never use the government plan because Medicare’s coverage is better. But what they have to go through is crazy. For example, a patient uses Medicare to go to a specialist. If he or she prescribes laboratory tests or medicine, they can’t get them because the pharmacies and laboratories require a prescription from a primary physician. Since this referral will end up chipping away at the primary physician’s capitation, he or she might just tell patients, "No, no, don’t get that medication, get this other one because it’s cheaper." Our plan would give Medicare patients direct access to the medication prescribed by their specialists, eliminating the farce thousands of patients go through. Believe me, this will reduce costs, not increase them. Instead of the federal government paying for one plan while we pay for the other, we need both plans to complement each other. CB: What will your emergency-room policy be? AAV: I don’t believe in the privatization of CDTs...or Centro Medico. Public policy should guarantee that there will be emergency rooms open 24 hours a day near beneficiaries. During discussions with the Health Secretary [Johnny Rullan], he told me the problems at Rio Grande and Luquillo’s emergency rooms, if I remember correctly, would be solved in the coming months. [The Health Department] has continued opening emergency rooms. The one recently opened in Rincon is working efficiently. The private sector plays an important role in health, but the government can’t shrug off its responsibility of caring for people’s health. It should guarantee that private hospitals and clinics offer quality healthcare. Health is one area in which the market by itself doesn’t work for the common good. Rossello is committed to putting Puerto Rico back on track on every front CB: What new local tax incentive would you support to promote Puerto Rico’s sustained economic growth? What other measures would you implement to alleviate the burden on local taxpayers? PRG: What we are proposing has been divided into two areas: what we are going to do on the federal level, which obviously will depend on a decision by Congress and not directly by us, and second, what we are going to do on the state [local] level. During my administration, we lowered income-tax rates; it was the largest income-tax reduction in Puerto Rico’s history. Individual income-tax rates were reduced significantly. On this occasion, we want to be more selective. We are proposing certain initiatives so Puerto Rico can participate in the federal earned-income tax-credit program, where taxpayers earning relatively low wages could receive a refund by filing a federal income-tax return. Those who do have to pay income tax could use the earned-income tax credit against their tax responsibility, while exempt taxpayers not only won’t have to pay income tax but will get money back as well. We are also proposing the implementation of an earned-income tax credit on the local [state] level. There are already 21 states in the U.S. that have a state earned-income tax credit. Under our proposal, those earning less than $15,000 a year will receive a tax credit. This proposal is based on a study by the [local economic policy think tank] Center for the New Economy. We analyzed it and believe it’s feasible. We will fight for the inclusion of Puerto Rico in the Social Security Administration’s Supplemental Security Income program. Other tax proposals include the elimination of some of the excise-tax increases imposed by the current administration on sport utility vehicles, minivans, and alcoholic beverages. We are also going to move forward again on the elimination of the marriage penalty, which had been legislated under our administration and which is an obstacle, a major burden to married couples. We are going to re-establish other tax exemptions that were important for the development of education, such as increased deductions for a dependant’s educational expenses as well as for educational IRAs [individual retirement accounts], for which we will set a higher level of deduction, from $500 to $1,000. We will increase the tax exemption for retirees 60 or older from $11,000 to $15,000 and for retirees 59 or younger from $8,000 to $11,000, starting with tax year 2006. We will also increase the taxable deduction for donations, from 33% to 50%. CB: Will you replace the excise (arbitrios) system with some sort of sales tax? PRG: We want to implement a consumer sales tax so we can spread the tax burden more evenly and make everybody participate by paying the tax when purchasing a product. This will allow us to lessen the tax burden, as it will be more widely distributed. At the same time, we know the sales tax is a regressive tax strategy, meaning those with less income pay a proportionately larger share of the tax, just like with the excise tax right now. CB: Puerto Rico’s manufacturing industry is concerned about issues that hinder its competitiveness in a global economy such as high electricity costs, spiraling labor costs from increasing fringe benefits to employees, and the loss of federal tax incentives. What will your administration propose to lower electricity costs? PRG: Our goal is to lower the cost of energy [from an average 11 cents per kilowatt] to one cent per kilowatt in 10 years. During our eight-year administration, we never increased electricity rates. We have to develop an infrastructure that is globally competitive; an important element of that is electric-power generation. Puerto Rico has one of the highest energy costs, which puts the island at a competitive disadvantage. This stems partly from the fact that electricity costs more on islands in general. One of the reasons for [these high rates] is that we aren’t connected to a geographically adjoining electric grid. Take, for example, New York, New Jersey, or Vermont. Their emergency energy systems don’t need such a high emergency-power capacity as ours does because we lack interconnectivity. Puerto Rico’s electricity system requires a capacity equal to the minimum capacity of the island’s largest electricity power-generation plant. To generate dependable electricity that supports all commercial and industrial activity on the island requires two new plants, one in the east and another in the west. Most electricity is generated in the south, which leads to higher costs. Bringing electricity-generation plants closer to their distribution areas will lower costs. Other cost-reducing strategies include repowering San Juan’s Units 5 and 6 with modern technology that allows production of cleaner and less expensive energy. In addition, we will build an interisland gas pipeline to provide natural gas for commercial and industrial purposes. We will install new mechanisms to stabilize electricity frequency and voltage. Consumers will also be able to pay their bills on the Internet while checking on their pattern of consumption. During our administration [1993-2000], we implemented some new energy-generation models. Until then, all electricity-generation plants were established with public funds. We knew that if we depended on public funds to expand our capacity to generate electricity, demand would soon surpass capacity. So, we began to consider co-generation. The first two plants were AES and EcoElectrica, which also got us started on diversifying our fuel sources. As a result, more than 30% of the energy consumed today in Puerto Rico comes from co-generator plants. Not having done this would have resulted in continuous blackouts, worse than the ones we have today, because with 30% less electricity, there is no way the system could be maintained. If we don’t increase electricity capacity, not only will Puerto Rico’s electricity rates soar, but electricity will be unreliable and unstable. In the long run, that situation could cost us more than expensive rates do. CB: What is your opinion on increasing employee fringe benefits and how they add to the costs of doing business in Puerto Rico? PRG: We have to examine this premise carefully. None of us wants Puerto Rico to become a jurisdiction characterized by low salaries and few benefits. What industries care about is productivity, the return on each dollar invested. It’s acceptable to have good salaries and benefits based on productivity. One can either invest and push for the reduction of benefits and salaries or invest in new technology to improve employees’ productivity. The latter should be our strategy. Economic development, on a larger scale, isn’t measured only in dollars and cents. Health and education levels, for instance, matter as well. Even though we are talking about economic development, we need to look at Puerto Rico’s development from a larger perspective. I definitely believe we should ensure good salaries, benefits, and a safe workplace. Nowadays, employers and employees see each other as rivals when they should see each other as parts of a whole. They are competing with other companies, not with each other. The idea that one person’s gain is someone else’s loss no longer holds true. We can both win. And it is very simple for both to win: raise productivity. CB: What initiatives are you proposing to attract more R&D to the island? PRG: My administration granted a 200% tax deduction on costs related to R&D or on costs related to human-resources education and training. We will continue using tax incentives to promote investment in technology infrastructure and R&D. There is no doubt that when you insert yourself in a new economy, what determines the largest added value in the manufacturing area is R&D. In Puerto Rico, we have pharmaceutical manufacturing companies, which is an important sector. But what do they do? They produce pills, which represents a relatively low percent of the entire [manufacturing] process. The added value is found in R&D and this is where we must expand our presence. CB: What kinds of tax incentives will your administration support? PRG: We will revise tax incentives currently in place for different sectors of the economy and reformulate them as incentives geared toward the economic development activity we need to promote. Traditional tax incentives, call them Internal Revenue Code section 936 or 30A or whatever, are becoming less important as time goes by. I recently met with a group of manufacturers discussing how Puerto Rico is competing with Singapore and Ireland and what incentives were offered. What I found interesting was that none of them mentioned tax incentives. I said, "You have discussed the need for human-resources skills, a fast government permitting processes, and better infrastructure but you didn’t mention Section 936, which is what I hear about all the time." In its studies, the government asked manufacturers what were the most important factors for companies investing in Puerto Rico. Those same tax incentives that our economy supposedly depends on were ranked near the bottom. They don’t determine whether a company invests here or not. In the new economy, we have to look at [tax incentives] as elements that, while perhaps marginally important, aren’t of primary significance. Again, I believe that instead of being focused on tax incentives just to be confused by them, we should count on factors we can control, such as our work force’s skills and the world-class infrastructure we can develop. CB: How will you strike a balance between the market’s demand for larger and cheaper retail offerings and the needs of small retailers, particularly in small towns? PRG: There are some obvious advantages megaretailers have, such as volume and convenience. But smaller retailers do things that bigger ones can’t. For example, you can have a small pharmacy in Comerio [near your home] or you can go all the way to Bayamon to find a megapharmacy. Second, we must search for mechanisms that help smaller retailers capitalize on the advantages they have. For example, we could study ways for pharmacies to join together to buy in bulk. Cooperatives are important because by forming purchasing cooperatives, you gain advantages vis-a-vis megacompanies. We have to look at the competitive edge that smaller operations have by offering good service, for example. Customers walk into small stores and the staff greets them by their names. We are developing a service- and knowledge-based economy, and the dynamics are different from when our economy was based on big industries. It is now characterized by smaller and more agile players. Take Apple, for example, which took over a big chunk of IBM’s market. Smaller businesses must search for their niche competition to provide the services megaretailers can’t offer. I don’t believe it is appropriate to place restrictions [on megaretailers], because all you do is lower [competition], which ultimately hurts consumers. We must allow the development of purchasing cooperatives so smaller retailers can capitalize on their benefits. CB: How do you plan to control the increase in costs in the government’s health plan, known as the Health Reform? Will you consider altering the range of benefits it offers beneficiaries? PRG: Benefits definitely affect the cost of healthcare. The [government] health plan is cheaper than private plans and in fact offers more benefits. Why the lower cost? Because we can negotiate by volume...and at the same time offer generous coverage. We intend everyone in Puerto Rico to have health coverage. This will be a universal right...and a mandate. Every resident will be required to have it. The effect this will have on productivity and economic development is crystal clear. I have had the opportunity to study and compare different health systems on a global level. No society has all the resources necessary to respond to all needs. As such, choices must be made. We are promoting a model in which the population is divided into three groups, and they would include not only the Health Reform regions, but the whole population [to allow everyone to have health coverage]. People over 65, regardless of income, would continue to be covered by federal Medicare. Those under 65 with income below 200% of the federal poverty level [currently, $12,123 a year, per person so 200% would be $24,246 ] would be covered by the local government’s Health Reform, as originally implemented under our administration. The local government would buy and finance health insurance from private insurance companies for this group. Those whose income is greater than 200% of the federal poverty level would be covered by private health insurance provided by their employers. All employers would be mandated to offer health insurance to their employees. About 85% of the employees in this income segment already have health insurance from their employers. This proposal would ensure the rest have fundamental coverage—not basic or minimum, but fundamental. Employers would have three options for providing insurance to their employees. First, they could purchase group insurance directly from any private insurance company, as most businesses already do. Second, they could purchase the government’s [more affordable] health-plan insurance. Third, they could set up a payroll tax [so the money would go directly to the local Treasury Department]. The government would then provide insurance through the Health Reform. Those businesses whose employees meet income requirements for the Health Reform would have no problem, because those workers are already covered by the Reform. Employers who want to offer employees extra benefits to attract the best could do so. But everyone would have the same fundamental coverage. It is common knowledge that if the entire population has access to services through health plans, people are healthier and productivity, higher. CB: What will your emergency-room policy be? PRG: The problem is we sometimes believe we need them in every municipality when actually we should establish them according to the size of the population they serve. For example, every municipality used to have clinics where mothers gave birth. Later, in areas such as Maricao or Las Marias, people would complain that babies weren’t being born there anymore [after the Reform was implemented]. People would tell me, "All the children are from Mayaguez now." Well, they’re from Mayaguez because they were born in Mayaguez hospitals, but they return to their municipalities to live. Every municipality wants to have something of its own, such as an emergency room. San Juan may require 200 emergency rooms, but Maricao might just need one, or none at all. It probably takes as much time to get to a hospital in San Juan as is does to go from Maricao to Mayaguez. Since Maricao is next to Las Marias, an emergency room on their border, for example, would serve both municipalities. From the point of view of health, the need [for emergency rooms] depends on demand. In turn, demand sustains emergency rooms. Granted, in some isolated communities such as Culebra, Vieques, or Castañer, demand alone is insufficient, and the government must take over to guarantee access even if it isn’t cost effective. The government must also be in charge of complex and expensive services—supratertiary services such as a heart transplants, for example—when the market can’t sustain them, as they aren’t cost effective. A hospital such as the government-run Centro Medico would then offer services that private hospitals don’t have the funds to provide. Centro Medico won’t be privatized. Obviously, if private hospitals want to offer the same supratertiary services as Centro Medico does, that is fine. CARIBBEAN BUSINESS Associate Editors Jose L. Carmona, Marialba Martinez, and Taina Rosa; Reporter Joanisabel Gonzalez-Velazquez; and Puerto Rico WOW News Editor Proviana Colon Diaz contributed to these stories. Next Week: Don’t miss the candidates’ proposals on tourism, the environment, ports, corruption, status, and more. This Caribbean Business article appears courtesy of Casiano Communications. or
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